Companies Bill, 2012- Comparative

Analysis

Prepared by: Deepti Thakkar LL.B. and ACS

Sudipto Banerjee LL.M., LL.B. and ACS

CONTENTS

• Private Company

• Public Company

• Further issue of capital

• Powers to be exercised at board meeting

• Restrictions on power of board

• Loans to directors

• Related party transactions

• Loans and investments

• Acceptance of Deposits

STRUCTURE OF BILL

• Companies Act, 1956 (“Act” or “Companies Act”) had some 658 sections and 15 Schedules, Companies Bill, 2012 (“Bill” or “Companies Bill”) has 470 sections and 7 schedules.

• Bill makes changes in the existing provisions, provides clarification(s), introduces new provisions such as:-

One Person Company

Corporate Social Responsibility

Key Managerial Personnel

Independent Director

Class Action

Dormant Company

PRIVATE COMPANY

• Section 3(1) (iii) of the Act, clause 2(68) of the Bill.

• The limit on maximum number of members has been increased from 50 to 200.

• Prohibition on invitation to public to subscribe “shares and debentures” substituted with “securities”.

• Provision for acceptance of deposits from directors or their relatives, as provided under Act, has not been reproduced in the Bill.

PUBLIC COMPANY

• Section 3(1) (iv) of the Act, clause 2(71) of the Bill.

• Provides a clarification that a private company which is a subsidiary of a public company may continue to be a private company in its Articles.

• Clause 58(2)- contracts between shareholders for transfer of shares enforceable.

PUBLIC COMPANY (cont’d…)

SUBSIDIARY

Clause 2(87)

(control by holding/ subsidiary of holding company)

Controls composition of

Board

Exercises/controls more than half of

total paid up capital

ACCEPTANCE OF DEPOSITS

• Section 58A of the Act, Clause 73-76 of the Bill

• Deposits defined under Clause 2(31) of Bill

• Provisions for deposits from members and public provided under Clause 73 & 76 respectively.

• Requirements for Deposits from Members:-

Special Resolution

Issuance of circular to members stating credit rating obtained

Specific provision for deposit redemption reserve account

Provision for deposit insurance

Compliance with Rules as may be prescribed

ACCEPTANCE OF DEPOSITS (cont’d…)

• Requirements for Deposits from Public:-

Public companies with such net worth/ turnover, as may be prescribed, can raise deposits from public. Under Act, Minimum net owned fund of company of 1 crore

Conditions under Clause 73(2) to be complied

Rating from recognised credit rating agency to be obtained

Rules to be prescribed by Central Govt. (CG)

FURTHER ISSUE OF CAPITAL

Section 81 of the Act

1. Not applicable to private company

2. For preferential allotment by company

• Special Resolution

Clause 62 of the Bill

1. Applicable to all companies

2. For preferential allotment

• Special Resolution

• Determination of price by registered valuer

FURTHER ISSUE OF CAPITAL (cont’d…)

Section 81(3) (b)

Increase in capital due to exercise of option attached to loan/debenture:-

• Approved by CG before such issue “or” Rules; And

• Debentures/loans other than issued to /obtained from Govt.- SR to be passed

Clause 62

Increase in capital due to exercise of option attached to loan/debenture:-

• Provided terms of issue approved by SR

POWERS OF BOARD EXERCISED AT BOARD MEETING

• Section 292 of the Act, Clause 179 of the Bill. • Under the Bill, following additional powers to be exercised at

a Board Meeting- • To issue securities, including debentures, within or outside India • to approve financial statement and Board’s report • to diversify the business of the company • to approve amalgamation, merger or reconstruction • to take over a company or acquire a controlling or substantial stake in

another company • any other prescribed matter

Restrictions on Board while delegating their powers given under sub section (2), (3) and (4) of the Act. Under the Bill Board may delegate ‘the powers specified in clauses (d) to (f) on such conditions as it may specify”

RESTRICTIONS ON POWERS OF BOARD

Sale of whole or substantially the whole of undertaking

• Section 293(1)(a) of the Act, Clause 181 of the Bill.

Companies Act, 1956

• Undertaking, substantially the whole undertaking not defined

Companies Bill, 2012

• Quantitative definition provided

• Undertaking: An undertaking in which investment of Company exceeds 20% of NW or which generates 20% revenue of Company

• Substantially the whole of undertaking: 20% of more of value of undertaking

RESTRICTIONS ON POWERS OF BOARD (cont’d…)

• Under section 293 of the Act, consent of company in general meeting is required, whereas clause 180 of the Bill provides that consent by way of special resolution is required.

• Provisions extended to private companies

LOANS TO DIRECTOR

• Section 295 of the Act, Clause 185 of the Bill

• Scope of section widened to include loans and loans represented by book debt.

• Under the Act, prior approval of Central Govt. required for making loans, giving guarantees, providing securities to directors or his relative; firm in which director or relative is partners, etc. Bill has completely ruled out the possibility of giving any loan/ book debt, a guarantee or a security, to any director or to any other person in whom the director is interested, except as provided under proviso to the said clause.

LOANS TO DIRECTOR (cont’d…)

EXEMPTIONS

Companies Act

any loan made, guarantee given or security provided –

-by private company, unless a subsidiary of public company

-by banking company

Loan made by holding company to its subsidiary

any guarantee given or security provided by a holding company in respect of any loan made to its subsidiary

Companies Bill

Giving of any loan to Managing/ whole time director-

a) As a part of condition of service extended to all its employees

b) Pursuant to any scheme approved by members by SR

Company which in due course of business provides loans/gives guarantees/ securities & in respect of such loans charges interest not less than bank rate declared by RBI

RELATED PARTY TRANSACTION

• Section 297 of the Act, Clause 188 of the Bill.

• Additional related parties under the Bill: Key managerial personnel or its relative

public company in which a director or manager is director or holds along with his relatives, more than 2% of its paid-up share capital;

any body corporate whose Board, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

any person on whose advice, directions or instructions a director or manager is accustomed to act

RELATED PARTY TRANSACTION

Companies Act Companies Bill

Transactions for which approval required: sale, purchase or supply of any goods,

materials or services ; or underwriting the subscription of any

shares in, or debentures of company

Transactions for which approval required: • sale, purchase or supply of any goods

or materials; • selling or disposing of, or buying,

property of any kind; • leasing of property of any kind; • availing or rendering of any services • appointment of any agent forpurchase

or sale of goods, materials, services or property;

• such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company;

• underwriting the subscription of any securities or derivatives thereof, of the company:

RELATED PARTY TRANSACTION (cont’d…)

Under Act, requirement of CG approval for companies entering in to RPT with paid up capital not less than 1crore. Under the Bill, requirement of SR for companies entering in to RPT with prescribed paid up capital/ transactions exceeding prescribed limit.

Board’s Report to contain a disclosure and justification of related party transactions.

Exemptions under Bill:

• No approval required when transaction is in ordinary course and on an arm’s length basis.

LOANS AND INVESTMENTS

Companies Act Section- 372A

Companies Bill Clause 186

Loans, guarantee, security to any body corporate

Loans, guarantee, security to any body corporate or person

Limit: not exceeding:- 60% of (paid up capital + free reserves) or 100% of (free reserves), whichever is more Free Reserves defined under 372A Prior approval of all directors present at BM

Limit: not exceeding:- 60% of (paid up capital + free reserves + securities premium) or 100% of (free reserves + securities premium), whichever is more Free Reserves defined under Clause 2(43)- change in definition Prior approval of all directors present at BM

If exceeds aforesaid limit- prior approval by SR

If exceeds aforesaid limit- prior approval by SR

LOANS AND INVESTMENTS

Companies Bill

Companies Act

LOANS AND INVESTMENTS (cont’d…) • Under the Act, rate of interest on loan is linked to bank rate,

under the Bill, rate of interest linked to prevailing yield of 1 yr, 3 yr, 5yr, 10yr Government Security closest to the tenor of loan

• Definition of Investment Company and Infrastructure Facilities provided under Bill.

• Investment through more than two layers of investment companies prohibited except acquisition of foreign company which has investment subsidiary beyond 2 layers, as per foreign law or subsidiary company making investment to comply with applicable law

Thank You…